Much Ado About (almost) Nothing

President Obama generated huge headlines yesterday by announcing caps on senior executive pay at large financial institutions.

The Wall Street Journal reported this morning that

President Barack Obama laid out strict new regulations on executive compensation Wednesday, strafing Wall Street with tough talk as Washington asserts increasing control over a financial sector seeking more government funds.

This declaration followed quickly on news that large banks had paid out $18 billion in bonuses last year while simultaneously receiving massive government funds.

At a time when most Americans are feeling pinched and anxious about the economy, Obama’s regulations on senior executive compensation will undoubtedly have much popular appeal.

Perhaps feeling a bit out-maneuvered politically, some prominent GOP legislators and conservative commentators have expressed doubt about the move. In another article in the same newspaper today, Senate minority leader Mitch McConnell is quoted as saying:

"I really don't want the government to take over these businesses and start telling them everything about what they can do."

Similarly,

Republican South Carolina Gov. Mark Sanford said Mr. Obama is pushing the federal government dangerously closer to nationalizing the banking industry. "The idea that the same government that ran [the emergency response to] Hurricane Katrina is going to run banks is frightening," he said.

Sean Hannity pitched in with,

"(it’s) a dramatic move away from capitalism and toward socialism"

The Journal also quotes a corporate governance lawyer with no apparent GOP connections as saying,

"It may be well-intentioned, but I wonder if it will have the practical effect of blocking the filling of vital jobs in troubled companies."

In the same vein, financial derivatives specialist Eric Falkenstein describes the potential damage pay caps could create through perverse incentives in a recent blog post.

All these people, but especially Republicans, should take a collective deep breath and relax.

Obama’s move was obviously highly political but also very shrewd in a way that many of the aforementioned may not appreciate.

The announced pay caps are highly, highly limited in scope.

First, it appears that the strict $500k limits will apply only to senior executives of three institutions: AIG, Citigroup, and Bank of America. Indeed, Citigroup’s CEO Vikram Pandit was paid only a bit more than $500,000 last year anyway.

Second, it appears that only the top five executives in each bank will be subject to those limits. Traders and desk heads will not be.

Third, large restricted stock grants are still permitted and may be realized by executives but only after their respective banks repay TARP funds. This is actually a good idea from a corporate governance perspective.

Obama enjoyed greater financial support from investment bankers and hedge fund managers than did John McCain. The White House announcement will not seriously inconvenience many of those highly paid financial professionals much at all.

Many of his announced regulations (“clawbacks” of bonuses for fraudulent practices) are not only sensible but are already being implemented by boards of directors at the behest of bank shareholders.

Democrats have benefited enormously from the popular but erroneous perception that Wall Street is a core Republican constituency. It isn’t.

Certainly, well-functioning and efficient capital markets are in everyone’s interests, but the GOP has no reason to expend precious political capital fighting the President on this matter.